The decision in Re Scottish Lion Insurance Company Limited  CSOH 127 concerned a preliminary hearing on two specific issues relating to the sanction of a solvent scheme of arrangement proposed by Scottish Lion Insurance Company Limited. A full sanction hearing is scheduled for January 2010.
The proposed scheme provided that its policyholders would be split into two classes, those with IBNR claims and those without IBNR claims. Both classes of creditors would obtain undiscounted early payment of their estimated claims under the scheme. The scheme meetings of the two classes of creditors were duly held, and the requisite majorities to approve the scheme under s899 Companies Act 2006 were obtained (although objections were raised to the valuation of the claims, casting some doubt on this). The legislation concerning schemes of arrangement is the same in Scotland as in England (each being a separate legal jurisdiction).
A group of creditors who had voted against the scheme objected to its sanction on a number of grounds. They argued that the scheme represented a compulsory confiscation of their valuable rights (being coverage under liability policies triggered by occurrences, which were, it was contended, irreplaceable in the current market) for little or no compensation. It was also questioned whether it could ever be fair to sanction a solvent scheme in the face of continuing opposition from policyholders.
The Court expressed its agreement with the respondent creditors' argument that "in a situation where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?" In this case there was apparently no reason, apart from the wishes of the shareholders, why the company should not continue with the run-off. In such circumstances the court would expect the promoters of a solvent scheme to be able to place before the court evidence showing why the scheme was in the interests of creditors, not merely in the interests of the company, if the minority were to be bound by the decision of the majority.
Although the Court did not actually dismiss the petition to sanction the scheme, and further argument will be heard on these and other issues at the sanction hearing in January 2010, it still casts serious doubts over the ability of insurers in Scotland to propose solvent schemes of arrangement, particularly in circumstances where the scheme involves IBNR claims. Furthermore, since the applicable legislation is the same in England, if this decision is followed, it will clearly be necessary for solvent English companies proposing schemes of arrangement of this nature to be able to put forward reasons why the scheme is in the interests of creditors, and not merely in the interests of the company and its shareholders.
The full judgement can be read by clicking here